A couple weeks ago, Fedex Corp tanked dramatically. Even though I prefer selling options against ETFs like DIA & SPY, I was tempted to look at FDX (Fedex) puts. FDX is an economic bellweather & it dropped from about $174 to $148 on that September day. FDX traded at $234 last December, & at $274 in January, 2018. Puts on individual equities like FDX offer premiums that are much higher than ETFs' put premiums. I didn't make the trade last month, but with FDX at $140.11 today, down $1.53 or 1.1%, it provides a good Lesson 1. Here's FDX's put option chain at this time:
As a put seller, I want to position myself to buy FDX "low," rather than at the current $140.11. I can sell the $140 put that expires on November 15, 2019 (November's 3rd Friday) & receive a $5.60 premium, the put option's BID price. Each put contract controls 100 shares (100 X $5.60 = $560), but let's simplify the lesson by considering one share (& no commission). Because I'm a seller of this put option, I must receive cash, the $5.60 premium. (Of course, the buyer of this put must pay cash.) The $5.60 hits my account on this put trade's settlement day, tomorrow. It's non forfeitable, it's mine. It collects interest, can be used to purchase other securities, can be withdrawn. But it's not "free." In return for the $5.60 that I receive, I accept an obligation to buy FDX if it drops below the $140 strike price between now & the close of November 15, a 44 day period. If FDX drops to $139, $130, $100, or even to $0, I'm obliged to buy FDX for exactly $140, the put's strike price. But if I pay the $140 strike price for FDX, is not my real cost $140 - $5.60 = $134.40? Buying FDX at $134.40 is buying it "low" relative to today's $140.11; more than 4% lower. If FDX drops to $130 or $100 or $0, I'm hurting. But not as much as if I had bought FDX outright today, at $140.11. Now if FDX stays above $140 over the next 44 days, I will not be obliged to buy FDX & my put contract expires worthless. My obligation to buy FDX at $140 ceases. All I'd receive in this case is the $5.60 premium that I earned on trade day. By the way, when I sell this put, to protect myself & my broker/dealer from a large FDX drop during the 44 days, I reserve $140 per share in my account's CORE position to finance the obligation of having to buy FDX at $140. ($140 X 100 shares in a put contract = $14,000 on reserve. This $14,000 earns interest in my money market fund, but the $14,000 can't be used otherwise.) I'm selling a cash secured put in this Lesson 1 (not a naked put that requires margin availability). If FDX stays above $140 (even if it goes back up to $274) by November 15's close, all I earn is $5.60. If so, $5.60/$140 on reserve = 4.0% for 44 days; over 33% annualized. To accept less risk, I can sell the $135 put & receive a $3.65 premium = 2.7% for 44 days; over 22% annualized. With even less risk, the $130 put pays a $2.33 premium = 1.8% for 44 days, nearly 15% annualized. What I like about selling puts (& calls), is that you can actually feel the risk, measure the risk, & then choose the strike price that satisfies your want & your tolerance.
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